U.S. Markets open in 2 hrs 49 mins

Edited Transcript of ELPE.AT earnings conference call or presentation 29-Aug-19 3:00pm GMT

Q2 2019 Hellenic Petroleum SA Earnings Call

Attica Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Hellenic Petroleum SA earnings conference call or presentation Thursday, August 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andreas N. Shiamishis

Hellenic Petroleum S.A. - CEO, CFO & Executive Director

* Konstantinos Panas

Hellenic Petroleum S.A. - General Manager of Supply & Trading

* Vasilis Tsaitas

Hellenic Petroleum S.A. - IR Officer

================================================================================

Conference Call Participants

================================================================================

* George Grigoriou

Pantelakis Securities S.A., Research Division - Analyst

* Henri Jerome Dieudonne Marie Patricot

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Nikos Koskoletos

Eurobank Equities Investment Firm S.A., Research Division - Head of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome and thank you for joining the Hellenic Petroleum conference call to present and discuss the first half 2019 financial results with the management of the company. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Andreas Shiamishis, CEO; and Mr. Vasilis Tsaitas, Investor Relations Officer. Gentlemen, you may now proceed.

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you very much, Konstantinos. Good afternoon, ladies and gentlemen. Thank you for attending the quarterly results analyst call and presentation.

Without further ado, let me turn to Page 2 to give you a brief overview of what we'll be talking about over the next hour or so. We have a strong performance for the quarter and this is despite the fact that we have a weaker refining environment, and we had a temporary crude market disruption as well because of the Druzhba pipeline. As you all know, we have the lowest benchmark margins in the last 5 years and the contamination incident lead to problematic supply of Urals in Europe and that also affected a number of other types of crude as well. However, on the positive side, we did have some stronger performance because of the U.S. dollar and euro exchange rate. And in terms of the market, we had growing performance in the domestic market.

As a result, our adjusted results -- adjusted EBITDA was at EUR 130 million, down from last year's second quarter. The Druzhba contamination incident, which led to increased crude cost was at around EUR 14 million. The overperformance was high in line with previous years as well despite the weaker refining environment. And we had record contribution from our petchems division. As you know, our 2019 results include the IFRS 16 impact, which has a positive impact on the EBITDA, but you see the other side of that in the depreciation and interest numbers.

Talking about interest, our financing costs have reduced further. It's a number of quarters that we have seen this trend, and we expect that to continue, if not accelerate, in terms of the reduction. And this is a result of not only market improvements, but also because of a stronger balance sheet and better deployment of our debt facilities. In terms of gearing, we have a 37% gearing, which is one of the lowest I can recall for the group, and net debt at EUR 1.4 billion, which is within the target range that we set for the group of roughly EUR 1.3 billion to EUR 1.5 billion.

As you know, at the end of the quarter, beginning of July, we repaid a EUR 325 million Eurobond out of our own cash balances and this is something which we did simply because it is clearly an area that further improvement can be achieved through a new market transaction. In terms of recent developments, we have a new Board, which was put in place on the 7th of August. In terms of the upstream, we have the lease agreements for the 2 blocks, West Crete and Southwest Crete, which were signed. We expect that the ratification will take place in the first part of the second quarter -- of the second half of the year. So within the next few weeks, we expect that to be going to the Greek Parliament. Also within July, we had the completion of the acquisition of the minority stake in Elpedison, which makes ELPE and EDISON 50-50 partners -- shareholders in the Elpedison group.

Page 4. We have our results where you can see that the performance of -- pretty much most units, with the exception of Refining, Supply & Trading as a result of the refining margins, are improved compared to last year, and you can also see the reduction in the financing cost for the quarter, and of course, for the year-to-date.

In terms of capital employed, just under EUR 4 billion. This excludes the lease liabilities, which are roughly EUR 200 million, EUR 220 million. And we've taken them out, so that there is some comparability in the numbers that you're looking at. They are shown in the pages, which have the financial information at the end of the presentation.

In terms of capital expenditure, we have spent just under EUR 80 million for the half year -- for the 6 -- for the second quarter. The projection is that we will be within the previously communicated range, which is EUR 160 million to EUR 200 million depending on the timing of some of the projects.

In terms of the industry environment, turning on to Page 6, the much talked about Druzhba incident is something which has affected our crude market. As you can see on the chart, we have parity with -- between Urals and Brent, but that is not the only implication of the pipeline contamination incident because we also had the impact on other types of crude in the Med, which were called to substitute the shortfall in Urals deliveries in the second quarter. Now since then, the situation has become much better and this is reflected in the third quarter margins as well.

In terms of the refining margins, we have clearly a different situation compared to last year. The Aspropyrgos refinery, which is the FCC index, has performed at a reasonably similar level to the first quarter. However, the Elefsina refinery has suffered the impact of the naphtha low cracks and the implications of the Urals mispricing in the quarter. We have seen this reversing in the third quarter, so the Elefsina refinery benchmarks, not the realized number, but the benchmarks is more in line with what we have seen in the previous quarters.

On the positive side, the domestic market has grown by 4%, mainly driven by the heating gasoil in the first part of the second quarter, and we have a stable demand for auto fuels, which is something which is positive. On the aviation and bunkering demand, there is a strong growth. We have aviation, but mostly bunkering fuel oils, which is much higher than last year. This is a result of regional pricing -- relative price points and the increased traffic coming through Piraeus Port.

The overall group results, which we try and summarize on Page 10, shows that we've gone from EUR 190 million -- EUR 187 million of clean EBITDA last year second quarter to EUR 130 million. The big driver is clearly the benchmark refining margins. We estimate about EUR 65 million of negative impact. The Druzhba impact on crude is another EUR 14 million. And on the positive side, we have the IFRS 16 and the foreign exchange. These are all numbers which are included in the clean results. So we have not adjusted these numbers for -- the clean results for these numbers.

In terms of the performance, we have a marginally better performance. The operations of the group are marginally better. And as you can see, the EUR 130 million is different to the second quarter reported EBITDA, which by equation this is of the EUR 190 million -- EUR 187 million as well for this year clearly because we have the inventory gain during the quarter even though prices went up. And we have adjusted for that impact, which is roughly EUR 60 million additional profit, which we have stripped out from the clean results.

In terms of credit facilities and liquidity, we have a much healthier maturity profile moving into 2020. We have some bank debt, which matures in 3 tranches, and we have the debt capital market, the Eurobond, which is out in the market about EUR 450 million. Clearly, it's significantly higher cost than what we would be able to refinance now. So that is an area that we're looking to see if we can get some benefits for the group. You see that the finance costs have gone down significantly over the last few quarters, and as I mentioned, we expect that to be even lower moving into the third quarter. That summarizes the overall group performance. And now we turn over to the individual business unit.

And I would ask Vasilis Tsaitas to take it from here and discuss the various business units performance.

--------------------------------------------------------------------------------

Vasilis Tsaitas, Hellenic Petroleum S.A. - IR Officer [3]

--------------------------------------------------------------------------------

Thank you, Andreas. Good afternoon, ladies and gentlemen. Moving on to Page 13, our core business Refining, Supply & Trading. Essentially we were looking at a headline number of adjusted EBITDA of EUR 67 million. As mentioned before, that was largely affected by the lowest benchmark margins in the last 5 years, especially for contract refineries and the one-off incident of the Druzhba -- contamination incident at the Druzhba pipeline. We've seen a resolution of that towards the end of the quarter and a normalization of benchmark margins in the third quarter already.

On the next page, on Page 14. Looking at production levels, it was largely flat versus last year with utilization levels over normal crude capacity considerably above 100%, especially for our south hub refineries, south -- Elefsina and Aspropyrgos while we've seen a recovery versus Q1 in terms of production.

Looking at the -- as a feedstock sourcing, I think it's worth noting the absence of railing and (inaudible) compared to last year. And if we're looking versus last quarter, also that is -- largely reflects the high sulfur pricing -- the high sulfur crudes pricing in the area and a switch towards lighter crude grades like Libyan, Egyptian and Kazakhi groups, CPC, which is due to the flexibility of our refining units to take advantage of opportunities in -- and run a diversified crude slate. This is also reflected in the yield of our refineries with fuel oil at just 10% for the quarter.

Moving on to next Page. Sales were also flat with domestic market recording an increase of 7%, just over the market increase while additional bunkering volumes were a bit lower than last year. Exports at minus 3% with total sales flat and the significant recovery versus the first quarter of 2019.

On Page 16, I mean, you can clearly see the impact of benchmark margins. However, we were able to maintain an overperformance of just over $5 per barrel. This is clearly somewhat lower than the previous quarters. And this is, obviously, reflecting around $0.5 from the impact of the Druzhba disruption in the crude supply of Russian crude in Europe.

Moving on to petchems on Page 18. EUR 28 million of adjusted EBITDA, it's the strongest report on record. That was largely supported by the higher polypropylene sales versus last year. And always worth noting the -- as a value of integration as Aspropyrgos, FCC and splitter units contribute the bulk of this result.

In terms of the Fuels Marketing business on Page 20. While sales volume are flat versus last year, we're looking at a higher share from retail in C&I sectors. We have profitability, leading comparable EBITDA, excluding -- I mean, excluding the IFRS 16 implementation impact at EUR 15 million. Adding that obviously that comparison for this year is much more favorable versus last year.

And on Page 21 on International Marketing business, comparable underlying performance flat versus last year on higher volumes in our Serbian and Bulgarian markets with overall adjusted EBITDA 12% higher year-on-year.

Moving on to our associates on Page 23. Essentially, our Elpedison JV, 50-50 JV with Edison was affected by a shutdown at our Thisvi plant during the quarter. And if we look on the comparison versus the past few quarters by the absence of the flexibility, remuneration mechanism that was discontinued and was not -- did not impact the results of the second quarter.

And on the last page, our gas business, DEPA. The comparison again with last year is affected by the change in the structure of the group as DESFA was sold in December. And during the second quarter last year, it was a large contributor of the profitability. While the distribution and supply business of Attiki, which was acquired and fully consolidated it -- during the second quarter has a lower contribution leading to the EBITDA at 5% and no contribution for the quarter for the group accounts.

At this stage, we'll stop the main part of the presentation, and we'll open the floor for any questions that you may have. Thank you very much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from the line of Grigoriou, George with Pantelakis Securities.

--------------------------------------------------------------------------------

George Grigoriou, Pantelakis Securities S.A., Research Division - Analyst [2]

--------------------------------------------------------------------------------

Congrats, Andreas, for the new position as group's CEO. I wanted to -- 2 questions. Your maintenance plans at the refineries going forward from Q3, I mean, this year onwards and next year, and if you could explain a bit what was the main driving force behind the increased profitability? Your domestic marketing operations in Greece, I mean, in Q2, they seem to have done particularly well.

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you very much, George. Now I'll start with the marketing profitability.

In terms of Greece, I assume or? Hello?

--------------------------------------------------------------------------------

George Grigoriou, Pantelakis Securities S.A., Research Division - Analyst [4]

--------------------------------------------------------------------------------

Yes, in Greece. In Greece.

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [5]

--------------------------------------------------------------------------------

Okay. Now in terms of Greece, we are looking at, first of all, the impact of the IFRS 16 given that we have a number of petro stations, which were previously treated as rentals...

--------------------------------------------------------------------------------

George Grigoriou, Pantelakis Securities S.A., Research Division - Analyst [6]

--------------------------------------------------------------------------------

Forgive me, Andreas. I'm talking about the comparable EBITDA of EUR 15 million.

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [7]

--------------------------------------------------------------------------------

Okay. Then it's slightly simpler. It's effectively a channel mix impact where we have -- even though we have similar volumes, 935,000 versus 932,000, we have an increase in the retail channel sales which is also across Greece, and we have a reduction in the bunkering business, which is a much lower margin. So it is effectively almost entirely attributed to the channel mix impact. For bunkers, effectively what we had was a slowdown of our sales into Piraeus for marine fuels. And that was a result of a switch of our delivery mechanism.

Effectively, there were not enough ships operating inside Piraeus because of changes in regulation. So there were not enough ships that we felt comfortable as a group to utilize. So we decided to restrict deliveries on bunkering fuel, which is a very low-margin business. And we see the retail business growing up. 2 independents things. So it's effectively volume and channel impact.

--------------------------------------------------------------------------------

George Grigoriou, Pantelakis Securities S.A., Research Division - Analyst [8]

--------------------------------------------------------------------------------

So if I understand correctly, sorry, you mean that the petrol station, the normal petrol stations actually saw an increase in volumes in the second quarter, correct?

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [9]

--------------------------------------------------------------------------------

Correct. Correct. If you see the bottom part of Page 20, retail is 395,000 volumes compared to 377,000 in 2018.

Now on the maintenance CapEx, we have a guidance, if you will, of roughly EUR 160 million to EUR 180 million for the full year. So we expect that number to be spent, which means that we should be expecting another EUR 80 million to EUR 90 million coming up in the second half of the year.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from the line of Patricot, Henri with UBS.

--------------------------------------------------------------------------------

Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [11]

--------------------------------------------------------------------------------

Just one question around the product mix and crude slate for the second half of the year. Like looking at the past 3 to 4 weeks, we've seen a much wider spreads between clean and dirty products very weak high-sulfur fuel crack, in particular, and you've said before that you are planning to adjust your mix and crude slate for IMO 2020. Is that something that you're already starting to do based on this latest changes or will that take place a bit later?

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [12]

--------------------------------------------------------------------------------

Thank you, Henri. I will ask Dinos Panas who's our -- the head of our Supply and Trading business to take that.

--------------------------------------------------------------------------------

Konstantinos Panas, Hellenic Petroleum S.A. - General Manager of Supply & Trading [13]

--------------------------------------------------------------------------------

Okay. Thank you, Andreas. Aspropyrgos refinery had a test run in IMO mode of operation late July, early August. The test run was successful and produced IMO fuel oil with a sulfur content of 0.48%, meeting all the very low sulfur fuel oil specifications. We are now ready to start the production of the new grade, and we plan to start doing so during the fourth quarter of the year, most probably in November depending, of course, on when the demand for the new fuel oil will start picking up. For that, we plan to change the crude slate to larger crude, and we have already contracted some volumes of light crude, and we'll continue to do so, volumes like Azeri, like Saharan Blend and Algerian crude and some American crude.

We are not full in where we would like to be in the fourth quarter, but we are -- we will be there in the first couple of weeks. And definitely, we have been noticing that the high sulfur oil cracks have weakened significantly in August ahead of the IMO global introduction -- very low sulfur fuel oil global introduction in the first quarter. The cost is to be at around minus $14 per barrel, pricing at some $30 per barrel lower than the gasoil crack. And this crack was around $20 per barrel a few days ago as you well know, and we monitor this closely, and hopefully, we can see how the margins will improve later this year because of the high, let's say, distillates cracks that everybody in the market expects.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [15]

--------------------------------------------------------------------------------

Excuse me. Just to come back to what George asked earlier because I think I misheard that's what I'm told. George asked about the maintenance shutdown for the third quarter, which is the case. We do have a scheduled shutdown in the third quarter for the southern half for Elefsina so it is something which will be taking place in the next few months. It may not affect the third quarter results. In fact, I would be surprised if we see an impact there other than the fact that it's an under-run refinery performance, which means that it's slightly below what we would expect but we shouldn't have a big upset. Fourth quarter, we will be seeing the impact of the shutdown. Apologies for not picking that up earlier.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from the line of Koskoletos, Alex with Eurobank Equities.

--------------------------------------------------------------------------------

Nikos Koskoletos, Eurobank Equities Investment Firm S.A., Research Division - Head of Research [17]

--------------------------------------------------------------------------------

Actually, it's Nikos, not Alex, not sure how that got through. Andreas, congratulations on your appointment. Have a quick question on DEPA. And is your strategy to pursue a deleveraging of your balance sheet through the disposal of that stake as well?

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [18]

--------------------------------------------------------------------------------

Thank you very much, Nikos. As you know, there are plans to change the current legislation with respect to DEPA privatization and maybe change the structure and the timing of the various transactions involved. Clearly, there is an interest in the natural gas market buyers. As we have stated in the past, that interest is binary while we have a controlling stake or we don't have anything at all. However, you're quite right because a part, which is actually a lot of the capital employed business, the regulated asset business for the local distribution networks is something, which prima facie is not within our radar screen, which means that if a sale of that business were to go through, then the project would go towards deleveraging the group even further.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

(Operator Instructions) Ladies and gentlemen, there are no more questions registered at this time. You may now proceed with your closing statements.

--------------------------------------------------------------------------------

Andreas N. Shiamishis, Hellenic Petroleum S.A. - CEO, CFO & Executive Director [20]

--------------------------------------------------------------------------------

Thank you very much. It's been a decent quarter for us, not as good as previous years. However, given the refining margins and the Urals issue, the second quarter has been a strong performer. I guess, the value of this is that even in terms of performance, even when you have a slightly softer refining margin, slightly weaker refining market, the new Hellenic Petroleum, new as in post the upgrades in Elefsina, Thessaloniki and the rest of the optimization, it's still a business which can deliver a significant clean EBITDA and significant cash flow year-on-year. I think that's a very strong message that we need to take back. And it's effectively a proof of concept that the company can deliver this in returns and results even in weaker environments. Clearly, we would prefer to have refining margins of 5% or 6% and be able to report EBITDAs of EUR 1 billion or even more. But we have to live with what we get in terms of the macro environment.

The other thing which is important is that the refinancing plan and the strategy to improve the balance sheet has practically been completed. So we have a very healthy balance sheet with ample capacity and low funding cost, which effectively allows us to be able to consider other growth options, and of course, to consider a slightly more stable yield on our stock for the shareholders.

So all in all, a good quarter, and we expect that the following quarter will be at least as good, if not better, given the first indications that we have. Thank you very much.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephone. Thank you for calling, and have a pleasant evening.